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Will You Cash Out Before the Market Crashes?

If you do, you may regret it.

Six -- count 'em, six -- major financial firms declared that the United States had entered a recession by February. That list included heavyweights such as Goldman Sachs, Merrill Lynch, and Morgan Stanley.

Several other financial institutions, while not yet using the "r" word, were nonetheless pessimistic. The Wall Street Journal quoted a recent Wachovia report that said, "There is no question that the economic news has taken an unusual and disturbing turn for the worse."

And even though the market has put up a polite little rally recently, if the worst is yet to come, you'd be daft not to sell ... right?

"An adverse feedback loop"After all, every part of our economy seems to be spiraling downward together. Janet Yellen, president of the Federal Reserve Bank of San Francisco, called this "an adverse feedback loop -- that is, the slowing economy weakens financial markets, which induces greater caution by lenders, households, and firms, and which feeds back to even more weakness in economic activity and more caution."

Students of American history will remember that a similar feedback loop prolonged the Great Depression -- and it took a world war to break that cycle.

So if the stock market does tank this year, we're all going to look back and say we saw it coming. Why wait for safer times?

Not so fastMy Foolish colleague Paul Elliott called this way of thinking "the real threat facing investors today." But he advises you to stick it out -- as do I. Two key points apply:

Recessions do not last long. Since 1945, none of the 11 recessions on record lasted more than 16 months -- and none longer than eight months since 1982.

Stocks do not all go down during recession. In reality, you can make a lot of money by investing when economic confidence is weak.

Take our last recession, March 2001 to November 2001, for example. During that time, the market had nearly the same number of gainers as decliners (2,000 or so on each side). While bellwethers such as MetLife(NYSE:MET), Wyeth(NYSE:WYE), and Amgen(NASDAQ:AMGN) were down (11%, 2%, and 6%, respectively), General Dynamics(NYSE:GD), Lowe's(NYSE:LOW), and Costco(NASDAQ:COST) were all up (25%, 65%, and 1%, respectively).

The killer stat, though, is this one: Since the 2001 recession began, more than 820 stocks have tripled. Eight months of contraction simply cannot stop great companies.

An aside to all of this optimismIt should be noted that stocks dropped substantially in 2000, leading up to that recession -- just as they've dropped in the past six months. Those examples, however, just go to show how the stock market does not move in lockstep with economic realties. Instead, it's an imperfect prediction machine with millions of analysts, institutions, and individuals trying to incorporate the information they know into daily trading decisions.

All that dynamism makes the market impossible to time, and if you're only starting to worry about recession as we may or may not be entering one, you are way late to the game. To get ahead of the curve, start thinking about buying and holding for the long term.

Don't just take our word for it, though. There's also brand-new research from IESE Business School professor Javier Estrada.

Javier who?Estrada's recent paper, "Black Swans and Market Timing: How Not to Generate Alpha," is one of the most persuasive cases I've read for a disciplined buy-to-hold investment philosophy.

Estrada studied 15 major global stock markets for periods ranging from 31 to 79 years, with the full data encompassing more than 160,000 trading days. What he found is "less than 0.1% of the days considered" actually matter to long-term returns, which means that "the odds against successful market timing are staggering."

So ... do not try to time the bottomNow, this is a dangerous article to go on record with. If the market does tank this year, I'm going to get plenty of profanity-laced emails telling me that I'm the real fool now (seriously, you'd think people would be over that joke by now).

But even if we lose money this year (yes, I'm staying invested myself), we're all going to make a lot more money down the line not by trying in vain to time the market but by adding new money to great companies on a regular basis.

That way, rather than run from the lows, we'll double down on them ... and supercharge our returns in the process.

Buy the best companies insteadThat's the tack Fool co-founders David and Tom Gardner are taking today in our Motley Fool Stock Advisor investment service, and we believe that today is offering some of the best buying opportunities since the 2001 recession -- which, remember, produced 830 triples in seven years.

If you'd like to take a look at the stocks we recommend today in Stock Advisor, click here to join our service free for 30 days. There's no obligation to subscribe, but if a crash is coming, we'll help you take advantage of it.

This article was first published Feb. 15, 2008. It has been updated.

Tim Hansondoes not own shares of any company mentioned. His hindsight is 20/20. Costco is a Stock Advisor pick. The Motley Fool has a disclosure policy.